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So much for that so-called Fed Pivot. U.S. inflation numbers for September this morning left little doubt the U.S. Federal Reserve will remain resolute in its quest to bring the rise in consumer prices under control through aggressive hikes in interest rates.

The hotter-than-expected data immediately prompted a selloff in stocks and bonds - with yields in government bonds in both Canada and the U.S. reaching multi-year highs. That selloff didn’t last long, however, with stocks bouncing higher by late morning - a potentially bullish signal that the recent market downturn has been exhausted. Bond yields also quickly retreated from their highs reached right after the inflation data at 830 am.

Market players are now confident the Federal Reserve will deliver a fourth 75-basis points interest rate hike next month, with more likely to follow.

The consumer price index rose 0.4 per cent last month after gaining 0.1 per cent in August and higher than Street expectations for a 0.2-per-cent rise. In the 12 months through September, the CPI increased 8.2 per cent after rising 8.3 per cent in August.

Little progress is being seen in getting core inflation down, either. Excluding the volatile food and energy components, the CPI climbed 0.6 per cent in September, and the 12-month rise was 6.6 per cent. That’s up from the core CPI reading of 6.3 per cent in August.

What’s the Street saying following the hot inflation print and the puzzling rebound in stocks? Here’s a sampling:

David Rosenberg, founder of Rosenberg Research:

A truly bizarre session — the S&P 500 opened 2.4% lower following the upside surprise to the CPI data, but surged higher and finished the day up +2.6%. There was no obvious catalyst for the move, except 3,500 (the level that was touched at the lows in the AM) as a key source of support (representing a 50% retracement level from the COVID19 lows). In our view, there was nothing fundamental about [Thursday’s] rally — it merely reflected an oversold bounce off a very key source of support, which brought out buyers. Friday represents the unofficial start of the Q3 earnings season, with a number of the big banks scheduled to report. Our expectation is that, in aggregate, S&P 500 earnings trends — and guidance — will disappoint and be the catalyst for the next leg lower in the market.

The most-shorted stocks soared nearly +7% yesterday compared with +2.6% for the overall market. That tells you something right there. And we knew that investors spent a record of more than $10 billion on put options on individual stocks last week — and covered early as the index was sliced shortly after the CPI data came out. In other words, all technical in nature, and attests to the unstable nature of today’s stock market.

One can say that +1,500 point swings in the Dow don’t happen every day, and that is true. But daily spasms like this only happen in bear markets — they are not the hallmark of bull markets and are to be treated with suspicion.

Recession odds took a giant leap forward [after Thursday’s release of inflation data], and there has never been a recession that didn’t see long Treasuries rally — there is no bottom in equities absent a reversal in the Treasury market

Louis Navellier, chief investment officer of Navellier & Associates, Inc.:

After a huge freefall by stocks to lows not seen since 2020 on the heels of inflation numbers that exceeded expectations, the market did a rapid about-face and surged almost as much into the green as it had initially fallen, leaving many investors scratching their heads trying to make sense of it. It was the 5th-largest intraday reversal from a low in the history of S&P 500, and the 4th-largest in the history of the Nasdaq Composite. The best explanation is a major short squeeze as seen in the rapid drop of the VIX, and the fact that it appeared that all the bad news on the Fed front was in.

Granted, we had an unprecedented six-day losing streak going, and a bounce was overdue. Stocks continued the high volatility throughout last night and into the open, going from up 1% to slightly red and back again.

Edward Moya, senior market analyst, The Americas, OANDA:

Today’s market reversal was a head-scratcher. Despite a hot inflation report, US equities turned positive as some investors are convinced core inflation will soon start trending lower. Fed tightening will remain aggressive at 75bp pace in November and possibly December. Monetary policy is quickly getting restrictive and that will undoubtedly send inflation lower. It looks like rates will peak slightly above 5% and for some that is good enough of a reason to get back into stocks. Today’s rally probably got a boost from short covering as well, but given the path for rates is higher, this market reversal won’t last long.

Thomas Hayes, managing member at Great Hill Capital Llc in New York:

We knew we were at an extreme inflection point and to see the market rally on bad news is actually really a sign of help because it just shows the selling has exhausted, the bad news is already known and now we’re going into earnings season with very low expectations. .... There are no sellers left. No question that we’re at or near (the bottom).

Kristina Hooper, chief global markets strategist at Invesco:

Markets have talked themselves off a ledge, so to speak, and they’re a bit more hopeful. ... If you’re at least starting to see headline CPI cool, there’s hope that core CPI will follow. There’s definitely that thought process coming in.

King Lip, chief investment strategist at Baker Avenue Asset Management in San Francisco:

People were perhaps net short going into the CPI report, and saw the report being negative and started covering their shorts. ... It’s technical factors ... bad news may have already been discounted. Going into earnings season, all we really need is things to be not as bad as suspected.

Sal Guatieri, senior economist at BMO:

U.S. inflation remained steamy in September, despite a pullback in gasoline costs, as price pressures showed little sign of subsiding. .... This is not what the Fed wants to see six months into one of the most aggressive tightening cycles in decades. The report cements expectations for (at least) a fourth straight 75 bp rate hike on November 2, and will heighten speculation of a similar-sized move in December.

Andrew Hencic, senior economist at TD:

Ouch! Another month and another disappointing CPI report. Both the headline and core figures surprised to the upside and show that August’s report was not a one-off. Looking forward, shelter costs will continue to underpin strong services inflation. So, despite multi-decade high mortgage rates and cracks emerging in the housing market, inertia in rents and homeownership costs will take time to moderate and be reflected in the CPI data. The good news is that the downward trajectory in core goods prices has resumed as price gains slowed to 6.6% in September from 7.1% in August.

Persistently strong core price inflation in September is going to keep the pressure on the Fed to keep the rate hikes coming. We continue to expect that the official policy rate will rise to 4.5% by early next year.

Jocelyn Paquet, economist at National Bank:

The price of shelter advanced at a steep pace and is now up 6.6% on a 12-month basis, the most since 1982. We continue to expect price gains in this category to moderate given the marked slowdown of the real estate market. But since declines in home prices are usually reflected in inflation data with some lag, relief might only be visible in the first half of 2023. Prices in other services categories, for their part, will continue to be supported by a strong labour market, which is fueling intense wage pressures. (Recall that the unemployment rate fell to a 5-decade low in September.) To slow down the job market, and hope to curb inflation within a reasonable delay, the Federal Reserve will therefore have no choice but to proceed with two other jumbo rate hikes this year. These will obviously weigh on growth in the United States and abroad.

If there is a silver lining for the Fed, it is to be found on the side of goods inflation. Core prices in this segment were flat in September and advanced indicators are pointing at a further moderation going forward. The decline of international transportation costs and the easing of supply-chain constraints are certainly positive factors, as is appreciation of the USD, which contributes in lowering import prices. But in the short term, these improvements risk being overshadowed by resurging energy prices. Gasoline prices indeed seem to have started to rise again in October, something which should put additional pressure on the Fed.

Michael Pearce, senior US economist, Capital Economics:

The stronger than expected 0.4% rise in consumer prices in September, driven yet again by a stronger increase in core prices, nails on a 75bp rate hike at the November meeting and, in contrast to the Fed minutes released yesterday, suggests that the Fed may need to continue raising rates at that pace in December and perhaps beyond too.

The 4.9% drop in gasoline prices last month means energy prices fell by 2.1% but, with wholesale prices more stable in October, that won’t be such a deflationary force from now on. Food prices rose by 0.8%, the same as in August, reflecting a slight moderation in grocery store inflation from the summer. But the real surprise was that, stripping out food and energy, core prices rose by 0.6% again in September, pushing core inflation up to 6.6%, a new cyclical high. Core goods prices were unchanged, but we had anticipated a fall, with used vehicle prices only declining by 1.1%, rather than the 3%+ falls suggested by the auction data. Recreational goods prices were unchanged, which could be an early sign of the broader easing in supply shortages feeding through.

For all the signs of continued strong inflation in the CPI data, there are still clear signs of disinflation everywhere else we look. The drop in used auto prices should continue to feed through, the survey evidence points to weakening price pressures, and the private sector measures of new rents point to an eventual sharp moderation in shelter inflation too – although that wont feed through in earnest until H1 2023. Until that shows up in the consumer prices data, the Fed will continue to sound hawkish, and press ahead with its rapid rate hikes.

Katherine Judge, Director & Senior Economist at CIBC Capital Markets:

The broad-based nature of price pressures was concerning, as even excluding the shelter component, other core categories were up by 0.5% m/m, matching August’s pace of increase. Other core categories that contributed included medical care services, car insurance, new vehicles, household furnishings/operations, and education. The increase in new car prices was somewhat unexpected given the improvement in supply chains and inventories in that sector, with the latter translating through only to a drop in used car prices. There is room for drops in both new and used vehicle prices ahead, as prices in both categories are up strongly over the past year. That will come as supply chains continue to improve and demand is limited by higher borrowing costs. There were signs of weak demand and high inventories resulting in price cuts in the apparel sector, something that could continue ahead as discretionary purchases are curtailed. Hotel prices were down sharply, and suggest that demand is slowing for some discretionary travel services.

Broad based price increases in core services categories, coupled with still-brisk labor market activity, suggest that the Fed could front load rate hikes by more than previously thought at the early November FOMC. The improvement in supply chains feeding through more meaningfully to prices in the quarters ahead will be a key factor in returning inflation to target next year, as the lagged nature of the shelter component will delay its easing.

Derek Holt, head of Capital Markets Economics, Scotiabank:

That US core inflation soared is becoming an all-too-familiar observation, yet it did it again in September by landing higher than consensus and a touch higher than my above consensus estimate. There is nothing here that says core inflation and its breadth is softening or leaning toward a Fed pivot. ... The rate path has been pushed into uncharted waters with the Fed likely more determined to crush inflation’s back with whatever pain is necessary.

With a report from Reuters and The Associated Press

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